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Ascension Insurance Holdings, LLC v. Underwood

Court of Chancery of Delaware

January 28, 2015

ASCENSION INSURANCE HOLDINGS, LLC, a Delaware limited liability company, Plaintiff,
v.
ROBERTS F. UNDERWOOD, an individual, and ALLIANT INSURANCE SERVICES, INC., a Delaware corporation, Defendants.

Submitted: January 27, 2015

Barry M. Willoughby, Rolin Bissell, and Margaret M. DiBianca, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Kaye E. Steinsapir, of BRYAN CAVE LLP, Santa Monica, California, Attorneys for Plaintiff Ascension Insurance Holdings, LLC.

Kathleen Furey McDonough, John A. Sensing, and Andrew H. Sauder, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Debra L. Fischer, of MORGAN LEWIS & BOCKIUS LLP, Los Angeles, California; Seth M. Gerber, of MORGAN LEWIS & BOCKIUS LLP, Santa Monica, California, Attorneys for Defendants Roberts F. Underwood and Alliant Insurance Services, Inc.

MEMORANDUM OPINION

GLASSCOCK, VICE CHANCELLOR

This Memorandum Opinion addresses the Plaintiff's request for preliminary injunctive relief enjoining the Defendant Roberts F. Underwood and his current employer, Defendant Alliant Insurance Services, Inc., from breaching a covenant not to compete entered by Mr. Underwood in 2008 as part of an employee investment agreement (the "EIA"). There is no question that the covenant, if enforceable, would support the injunctive relief sought here. The Defendants argue strenuously, however, that the covenant is unenforceable as against the public policy of California, the state where the contract was entered.[1]

I. BACKGROUND

I heard oral argument on the Plaintiff's Motion for a Preliminary Injunction on October 15, 2014. In a bench decision, I denied the Motion without prejudice and allowed the parties to engage in supplemental briefing addressing (1) whether the EIA was part of an asset sale, and (2) whether a 2011 employment agreement superseded the EIA. I heard oral argument on that supplemental briefing on January 21, 2015, after which the parties filed additional memoranda on the remedies sought. The background that follows is based on the facts gleaned from the limited record developed as described above.

Underwood participated in a sale of the assets of Paula Financial to the Plaintiff, Ascension Insurance Holdings, LLC (the "Parent" or the "Plaintiff") in 2008. That transaction was governed by an asset purchase agreement (the "APA"). In connection with the APA, Underwood entered into an accompanying employment agreement (the "Employment Agreement"), and pursuant to both contracts he agreed to refrain from engaging in the business of the Parent or its subsidiaries, including Underwood's former employer, Ascension Insurance Services, Inc., (the "Subsidiary"), for a period of five years. Those contractual arrangements were entered into in January and February of 2008, and the covenants by which Underwood agreed not to compete for five years after the transaction closed-provisions that were contained in the APA and the Employment Agreement-have lapsed. However, as part of the asset sale, the parties to that sale contemplated that a subsequent arrangement would be reached between Underwood and the Parent permitting Underwood to purchase an interest in the Parent. That agreement, the EIA, was entered into in July 2008, some five or six months after the Employment Agreement and APA, respectively, were entered into and became effective. As part of the EIA, Underwood agreed not to compete with the Parent or Subsidiary for a period of two years after leaving employment with the Subsidiary. It is that provision which the Plaintiff seeks to specifically enforce here.

II. STANDARD OF REVIEW

Under the well-known standard for a preliminary injunction, a plaintiff must demonstrate: (1) a reasonable probability of success on the merits; (2) that absent preliminary injunctive relief, it faces imminent and irreparable injury; and (3) that such harm outweighs the harm that may result from the injunction, should it prove to have been improvidently granted.[2]

III. ANALYSIS

Unlike Delaware, California public policy disallows contractual agreements not to compete.[3] In other words, in California, a contracting party's right to freely be employed (and to compete thereby with the parties with whom he has contracted) trumps his freedom to contract. This is not a common-law prohibition; it is enshrined in statute.[4] There is, however, a narrow exception to that statutory prohibition against covenants not to compete; where a covenant not to compete is a part of a sale of equity (or assets) that includes goodwill, the parties may restrict the seller from competing against the purchaser of the interest, to protect the value of the goodwill that the purchaser is acquiring.[5]

In the EIA, the parties agreed to both Delaware venue and Delaware choice of law. Delaware law respects the parties' right to freedom of contract, including with respect to reasonable covenants not to compete.[6] Delaware also follows the Restatement (Second) of Conflict of Laws (the "Restatement"), under which the parties' choice of law will generally control an agreement.[7] The Restatement recognizes an exception to that general principal, however: where the parties enter a contract which, absent a choice-of-law provision, would be governed by the law of a particular state (which I will call the "default state"), and the default state has a public policy under which a contractual provision would be limited or void, the Restatement recognizes that allowing the parties to contract around that public policy would be an unwholesome exercise of freedom of contract.[8] In other words, the Restatement is generally supportive of choice-of-law provisions, but recognizes that allowing parties to circumvent state policy-based contractual prohibitions through the promiscuous use of such provisions would eliminate the right of the default state to have control over enforceability of contracts concerning its citizens.

Here, the contract at issue-the EIA-was entered between a California resident and a Delaware limited liability company that has its principal place of business in California. The EIA was negotiated in California[9] and involved an agreement not to compete that was limited almost completely to areas within California, by virtue of the geographic scope of the Plaintiff's business.[10]California is the state with the strongest contacts to the contract, and there is no question that, absent the contractual agreement of the parties to import Delaware law, California law would apply here.[11] In such a case, the Restatement provides that I must determine whether enforcement of the covenant would conflict with a "fundamental policy" of California. If so, I must determine whether California has a materially greater interest ...


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